Sunday, May 04, 2008

Will Murdoch be Zell's exit strategy?

Rupert Murdoch may be standing pat on his bid for Newsday, because he knows that Sam Zell knows that News Corp. is probably the only plausible acquirer if the highly leveraged Tribune Co. deal goes south.

Like a pair of masters plotting several moves ahead in a chess game, Rupe and Sam may be using the Newsday transaction to see how News Corp. could come to the rescue in the event the Tribune Co. can’t reverse the declining performance that threatens to plunge it into default on its $12.8 billion in debt.

With Tribune owing approximately $1 billion a year in interest payments and the company producing less than $1.2 billion in free cash in 2007, it is perilously close to being unable to satisfy its obligations within a couple of years. The skinny margin for error is why the major bond-rating agencies have dropped Tribune’s ratings deep into junk territory and have warned within the last three weeks that the rating could be reduced even further.

The bond agencies, and Mr. Zell, have reason to be concerned. As Sam and his CFO reported in a recent conference call for investors, publishing cash flow fell 16% in 2007 and newspaper ad sales, which historically have produced three-quarters of the company’s revenues, slid at double-digit rates in the first three months of this year.

While Plan A for Sam and his crew of Clear Channel alumni certainly is to reverse the declining fortunes of the company, they would be remiss if they were not at least considering Plan B. And the most likely one would be selling Tribune to News Corp., the only company with the financial capacity, the demonstrated appetite and the testicular fortitude in the person of Rupert Murdoch to heavy up on traditional media at a decidedly inhospitable time for such businesses.

Assuming the News Corp. acquisition of Tribune were blessed by the federal authorities (more on that in a minute), the combined company would possess, among other things, three television stations and three newspapers (including the Wall Street Journal) in New York; three television stations and the major newspaper in Los Angeles; three television stations, one cable channel and the major newspaper in Chicago; two television stations and the newspaper in Orlando, and one television station and one of the major papers in Miami-Fort Lauderdale.

This is not to mention such enviable assets as the WGN superstation carried widely on cable TV and Tribune’s shares of Cars.Com and Career Builder, the only successful online ventures produced by the newspaper industry in the last 1½ decades.

Careful readers, which may include certain federal antitrust authorities, will note that the rich collection of assets in these major markets would surpass the cross-ownership limits now in place. But that’s where the Newsday deal comes in. Rupe and Sam hope to convince regulators that massing mainstream media properties in a market is necessary to assure their survival in an age of competition from the likes of Google and myriad other web and mobile upstarts.

If Rupe and Sam are successful in pulling off the consolidation of Newsday and the New York Post to achieve new efficiencies in marketing, ad sales, news gathering, production and distribution, then how hard would it be to argue that there is no harm in combining WPIX, WNYW and WWOR to do the same thing on the broadcast side of the business?

Careful readers also might observe that Fox and Tribune both own CW affiliates in certain markets. But this is an opportunity, not a problem. News Corp. could use one of the spare CW outlets to air the Fox News Channel, the Fox Business Channel or perhaps something like a 24/7 interactive version of its wildly popular American Idol. In a regulatory pinch, News Corp. simply could sell off the third stations to mollify the feds.

The knowledge that he is the most realistic, if not the only, exit strategy for Tribune Co. is likely why Mr. Murdoch has been patiently letting the bidding for Newsday play itself out.

Mortimer Zuckerman, the publisher of the New York Daily News who stands to lose the most if Newsday goes to News Corp., essentially has matched the terms of Mr. Murdoch’s offer in the hope the government will block the combination as anti-competitive. Although Cablevision reportedly has bid $70 million more than the $580 million that Mr. Murdoch and Mr. Zuckerman each has offered, the deal includes real estate that Mr. Zell , the consummate landlord, evidently is not disposed to sell.

If Mr. Zuckerman is right, then he presumably will get to buy Newsday and give the New York Post a proper run for Mr. Murdoch’s money. If Mr. Zuckerman is wrong, then his marginally profitable newspaper will be in the fight of its life.

Either way, the sale of Newsday will buy Mr. Zell a bit more wiggle room to pursue a profitable outcome for Tribune Co. If the wiggling goes badly, however, Rupert Murdoch is most likley the guy Sam Zell will call for help.

5 Comments:

Anonymous John R. said...

Alan, I'm sure by now you've seen the news of the Star Tribune's trouble. I recall you predicting a few months ago that Mpls. and Philly might run into problems this year meeting their obligations.

I'd be interested in hearing your update on the Strib situation, and also what you see happening with McClatchy over the next year.

7:28 AM  
Blogger Newsosaur said...

Best update on Start Tribune is here:

http://www.minnpost.com/davidbrauer/2008/05/04/1732/strib_on_verge_of_bankruptcy_ny_post_reports

7:54 AM  
Anonymous Anonymous said...

I agree with a lot of what you say here, but believe you are leaving out one very interested party: Congress. Democrats in particular will not allow Murdoch to gain so much power with a Tribune purchase, no matter how dire the financial straits Sam Zell says they are heading into. I can easily see the fight would be led by Sens. Chuck Schumer of New York, Richard Durbin of Illinois, and Barbara Boxer of California -- a formidible trio, indeed. Each has already spat venom at Murdoch, and any move by regulators to waive anti-competitive rules would bring screams of outrage and endless congressional investigations. Actually, I think they might just let the Newsday-Murdoch deal go through, but any thoughts of a larger News Corp.-Tribune package would bring lawmakers out of the woodwork.

8:30 PM  
Blogger Stephen said...

that would be really, really bad - at least for democracy. but since murdoch appears to be the only person actually investing money in the media... well, i'm not sure what to think at all.

10:11 AM  
Blogger Ken Doctor -- Content Bridges said...

Alan: Your notion of a Zell/Murdoch endgame is right on, at least as an option. Newsday, as we know, may pay down one balloon debt payment, but no plan short of asset sales to meet future ones.

Murdoch and Zell may well be all about moving around the chess pieces. I'm more intrigued by the Cablevision/Newsday possibility -- convergence may be ready for prime time. More on that at http://www.contentbridges.com/2008/05/important-detai.html

Ken Doctor

10:32 PM  

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